A U.S. dollar note lies alongside other currencies including (L-R) the Australian Dollar, Singapore Dollar, Korean Won and Chinese Yuan. It makes sense for nervous American investors to buy Treasury bonds, despite their negative returns. But foreigners will lose big from the falling dollar. So why do they keep buying?

No, I'm writing this because U.S. Treasury securities historically have historically had much lower return than government securities in other. As I pointed out kast year, they yielded on average 1.1% less per year in the period of 1984-2008 than in other "safe haven" countries like Japan and Switzerland. Compared to for example Australia and New Zealand, they yielded 2.3% and 4.3% receptively less per year on average in that period.

Now, perhaps it can be justified for particularly risk averse Americans to invest in U.S. Treasury securities since they at least carry no exchange rate risk for them. But for foreigners, they suffer both the additional exchange rate risk and the lower expected return, making it very irrational for non-Americans to invest in U.S. treasury securities.

So why do they do it? Either 1) they want to give away part of their money to the U.S. government, or 2) they are ignorant of the fact that U.S. Treasuries for them is both risky and have a low expected return or 3) They have ulterior motives for their investments, such as preventing their exchange rate from appreciating too fast.

Explanation number 1 is probably not so common. Explanations number 2 is the likely explanation for the vast majority of private bond investors and explanation number 3 is the likely explanation for most governments and central banks.

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